Abstract

The alleged justifications for government borrowing in a country which issues its own currency are examined here. The conclusion is that no justification exists for borrowing money in the normal sense of the phrase “borrow money”: that is, the use by one entity of money loaned by another entity, and so as to fund expenditure by the first entity. In contrast, and where a deflationary stance is required, it is justifiable for government (or as is more usual, the central bank) to borrow in the sense of withdrawing funds from the private sector and purely so as to stop those funds being spent. Moreover, inflation destroys a proportion of the money “borrowed”. Plus government effectively confiscates (via tax) the money needed to pay interest on this “borrowed” money. This is essentially a money shredding operation. This is not the normal meaning of the word borrow.

Many of the points made here apply to the central bank of a common currency area. Individual countries within a common currency area are not considered.

Item Type:

MPRA Paper

Original Title:

Government borrowing is pointless where a government issues its own currency.

Kellermann, K. (2007). Debt financing of public investment: On a popular misinterpretation of “the golden rule of public sector borrowing”. European Journal of Political Economy, 23 (4): 1088-1104. http://econpapers.repec.org/article/eeepoleco/v_3a23_3ay_3a2007_3ai_3a4_3ap_3a1088-1104.htm

Martins, N.C., and E.Villanueva (2003). The Impact of Interest-rate Subsidies on Long-term Household Debt: Evidence from a Large Program. Working Paper 713. Department of Economics and Business, Universitat Pompeu Fabra. http://ideas.repec.org/p/dnb/dnbwpp/026.html